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Short Sale Guidelines.
As lenders adopt new federal guidelines, short sales should become less frustrating for all. By Robert Freedman | February 2010 The federal government’s long-awaited guidelines for standardizing short sales were released at the end of 2009, and although they don’t take effect until April, mortgage servicers have the option of implementing them early. The short sales guidelines are part of the government’s new Home Affordable Foreclosure Alternative Program, known as HAFA, which is an add-on to the Obama Administration’s more wide-reaching Home Affordable Modification Program launched in early 2009. The idea is that if borrowers are eligible for the modification program but are unable to work out a plan to stay in their home, they—and their lenders—have a well-mapped route for executing a short sale or a deed in lieu of foreclosure. The new HAFA program applies to the large volume of so-called "risky" loans that were issued outside of Fannie Mae and Freddie Mac guidelines during the housing boom, such as zero-down loans, option ARMs, and Alt-A mortgages that didn’t require extensive income documentation (see sidebar, "Which Loans Are Eligible?"). As of this writing, Fannie and Freddie were developing their own, similar guidance for loans they’ve backed. The HAFA guidelines are voluntary, but major banks and servicers—including Bank of America, Chase, Wells Fargo, and Citimortgage—as well as dozens of smaller lenders, are expected to participate, clearing up the logjam of potential short sales on their books. To participate, a mortgage servicer must have opted in to the government’s Home Affordable Modification Program by the close of last year. Through the end of November 2009, there were 78 such mortgage servicers, which together cover approximately 85 percent of eligible mortgage debt, according to the program’s servicer performance report. How the Rules Will Help Observers say the HAFA guidelines speak to many of the real estate industry’s ongoing frustrations over short sales. For starters, lenders will have a financial incentive to get these deals moving. Servicers get $1,000 to cover their costs, and subordinate lien holders get up to $3,000 through a matching arrangement in exchange for relinquishing their lien. In addition, borrowers receive $1,500 to defray their moving costs. The guidelines also include standardized forms, procedures, and timelines—and allow the borrower to receive preapproved short sale terms prior to the property listing. These measures should address the resistance of serious buyers to invest time, money, and effort into a purchase offer without having any assurance that the lender will accept their offer or even look at it in a reasonable time frame (or, just as bad, accept a last-minute rival offer). Also, the HAFA rules require that borrowers be fully released from future liability for the debt. That will be a relief to home owners in recourse states who would otherwise remain liable for debt collection. Slightly fewer than half of the states are recourse states. Which Loans Are Eligible? The Home Affordable Foreclosure Alternative Program provides short sales guidelines for loans not owned or guaranteed by Fannie Mae or Freddie Mac (those agencies are expected to release their own, similar guidance). The following conditions also must be met: - The property is the borrower’s principal residence.
- The mortgage loan is a first lien mortgage originated on or before Jan. 1, 2009.
- The mortgage is delinquent or default is reasonably foreseeable.
- The current unpaid principal balance is equal to or less than $729,750.
- The borrower’s total monthly mortgage payment exceeds 31 percent of the borrower’s gross income.
Robert Freedman
is a senior editor of REALTOR® magazine. He can be contacted at
rfreedman@realtors.org.
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